House prices are beginning to show tentative signs of recovery, not only in some of the recent building society reports showing small overall increases, but also according to the City of London investment markets.

The City boys are trading in residential property derivatives and these look forward to the future state of the housing market and the way these are currently being priced suggests that any further declines in the property market will be far less than originally forecast.

At the start of 2009, the signals coming from the City derivatives market was that house prices could fall a further 30% between 2009 and 2011. As the first half of the year comes to a close, the same market is predicting further drops of less than half of that expected, some 12%.

And say the experts, this sudden reversal of fortunes has been taking place in only the last few weeks, signalling a quite dramatic change in sentiment over the short to medium term future of the U.K. housing market.

It is believed that the improving signs in the City have come about because speculators have entered the derivatives market and bought property exposure at deeply discounted levels.

This trend seems to be borne out by May’s Nationwide House Price Index which went up a touch at 1.2%, although the building society was quick to point out that this did not mean that the market had bottomed out.

But also confirming the recovery trend has been anecdotal evidence from estate agents which point to a large increase in cash buyers, especially those at the top end of the market, where one agent reported that over 40% deals were done for bundles of notes.

This cash – from various sources including top-of-the-market house sales and the closure of stock market portfolios – is having to find a home somewhere and property seems a good bet.

Property experts were keeping their fingers crossed that the upward trend was set to continue over the coming months.

Guest Article by Neil Camp